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EUROPEAN MIDDAY BRIEFING – Stocks Edge Lower Ahead of U.S. Jobs Report


MARKET WRAPS

Stocks:

European stocks ticked down as investors await the latest jobs report that is expected to provide insight into the labor market recovery and monetary policy ahead.

Bank stocks climbed, with UBS rising 2.7% and Deutsche Bank up 2.5% as higher bond yields suggest lenders could charge more interest on loans.

Stocks came under pressure this week after the Federal Reserve’s minutes confirmed its intention to pull back stimulus and suggested it might do so sooner and faster than previously planned, due to high inflation. The S&P 500 is down 1.5% this week, on track for the worst weekly performance since mid-December.

“Everything happening in markets this week was about expectations on how fast the Fed is going to tighten policy,” said Fahad Kamal, chief investment officer at Kleinwort Hambros.

“This is a transition year where we go from record policy support toward actual tightening. There will be huge volatility as we figure out how to work in this paradigm.”

Shares on the move: Shell’s update for the fourth quarter of 2021 is below market expectations, ING said, adding that the company won’t reach its $6.3 billion adjusted earnings forecast for the quarter.

This reflects the fact that Chemicals is expected to deliver break-even earnings, weaker results in Oil Products, and Integrated Gas production halts in Australia.

However, it is difficult to know to what extent shares will move on these numbers, given that the company confirmed another $5.5 billion share buyback and Brent oil prices have risen above $80, ING said. “Our Hold with a TP of EUR20.50 stands as we believe all good news of RDS is discounted in the current share price,” the Dutch bank said.

Data in focus: Eurozone inflation was running hot at the end of 2021, but Pantheon Macroeconomics sees tentative signs that some of the key drivers of the recent increase are now reversing.

Pantheon said core goods inflation will decline sharply in January as base effects from the temporary 2020 VAT cut in Germany drop out of the numbers.

Pantheon also suspects that energy inflation will fall due to base effects. “If we are right, markets, and the European Central Bank, will breathe a sigh of relief, but we think it will be short-lived,” Pantheon said.

Energy inflation will come down only slowly, and with food inflation now seemingly on the rise, the headline will remain high overall through most of this year, Pantheon said.

After reaching 5.0% in December, headline eurozone inflation should fall this year as the energy component plummets, Capital Economics’ senior Europe economist Jack-Allen Reynolds said.

Looking ahead, base effects related to Germany’s VAT cut in 2020, as well as the re-weighting of the inflation basket, will probably knock about 0.5% points off headline inflation in January, the economist said.

Over the course of the year, energy inflation is almost certain to drop sharply too, Reynolds said.

Capital Economics forecasts that the contribution of energy to headline inflation will fall to around zero in December 2022 from 2.5% points in December 2021.

German industrial production fell slightly in November missing forecasts for an increase, as supply-chain bottlenecks and rising producer prices continue to take their toll on production, read the economists’ views here .

U.S. Markets:

Stock futures edged up, futures tied to the S&P 500 rose, pointing to the broad-market index recouping losses after closing down 0.1% in Thursday’s choppy session.

Meme stock GameStop surged over 18% in premarket trading after The Wall Street Journal reported the company was planning to enter the cryptocurrency and nonfungible token markets. AMC Entertainment, another company popular with retail traders, jumped 6.5%.

The jobs report for December is slated to go out at 8:30 a.m. ET, with data on nonfarm payrolls, the unemployment rate and average hourly earnings.

Economists are forecasting that U.S. companies added jobs at a faster pace in December, although the surveys were done before the recent sharp rise in Covid-19 cases.

Fed officials have said labor market health is a crucial factor in their monetary policy decisions. Investors will be scrutinizing the report closely to see if it is consistent with the Fed’s plans outlined in the minutes and whether wages are continuing to increase, which could mean more sustained inflation.

“If the data shows the labor market is still running pretty hot, it strengthens the case for hawks that the Fed needs to get on and tighten policy,” said Sebastian Mackay, a multiasset fund manager at Invesco.

Lighting company Acuity Brands and transport firm Greenbrier Companies scheduled to report earnings ahead of the opening bell.

Forex:

The dollar fell as investors look ahead to the latest U.S. nonfarm payrolls report. “Investors remain prudent ahead of the first key economic test of the new year,” Unicredit analysts said.

A strong payrolls number is expected, meaning the dollar is potentially exposed to some setback should the data disappoint, they said.

However, any declines will be limited with EUR/USD unlikely to breach 1.1380 as the dollar remains supported by the progressive rise in long-term U.S. Treasury yields, they say. If the data meet expectations, fresh dollar strength should emerge and EUR/USD 1.1220 is the first support level to monitor, they said.

The euro stayed higher versus the dollar after data showed eurozone inflation unexpectedly accelerated in December. “Headline eurozone inflation should fall this year as the energy component plummets,” Capital Economics economist Jack Allen-Reynolds said. “But we think that core inflation will remain around 2%.”

Bitcoin fell due to a lack of risk appetite and the internet shutdown in Kazakhstan amid mounting social unrest, Swissquote Bank analyst Ipek Ozkardeskaya said.

“Kazakhstan is one of the biggest power houses for bitcoin miners,” she said. Last year the nation became the world’s second-largest center for bitcoin mining after the U.S., according to the Cambridge Centre for Alternative Finance.

Bitcoin could test the $40,000 psychological support level, which probably won’t attract investors looking to buy the cryptocurrency at lower levels just yet as the prospects of tighter monetary policy globally will weigh on the market mood, Ozkardeskaya said. Bitcoin dropped 1.7% to $42,465, having earlier reached a three-month low of $40,920, according to FactSet.

Bonds:

Government bond yields in the eurozone are unlikely to drop, said ING’s rates strategists. “Supply pressure, in particular portfolio rebalancing among potential buyers, means a retracement lower in yields is unlikely in our view,” they said.

The pace of rise in government bond yields could be surprising, “but the direction of travel was never in doubt.”

Eurozone government bond yields were…



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